I find myself wondering sometimes, whether or not we are living through the end of days of Western dominance of global affairs. This might sound a touch dramatic, but I can’t help but feel we are drowning in a sea of terrible decisions, but seem blissfully unaware of what is happening. We face great challenges, but our bureaucracy is ill-prepared to respond to these effectively.
News last week was dominated by the pre-announcements concerning Obama’s plans for the new regulatory system to govern the financial sector in the US. Although light on detail, what leapt out at me was that there will now be 6 (yes 6!) different regulating bodies; none of whom will take overall responsibility.
So what will happen when things next go wrong? It will be no-one’s fault of course!
Although there were positive points to the plan, such as increasing capital reserve requirements substantially, surely we have learned from the current crisis that the lack of accountability sowed the seeds for reckless and irresponsible behaviour.
Let me give one example where issues might (almost certainly will) occur. If I understood this correctly a distinction has been made between “standardised” and “customised” derivatives. Leaving to one side what determines a “standardised” derivative from a “customised” derivative, this part of the plan is begging for trouble.
Once the new regime comes into force, how long will it be before there is a rush to create “customised” derivatives? While playing within the newly defined rules this gives the banks a sanctioned area to “innovate”, without recourse. Am I the only one who sees the potential for Credit Crisis II in this?
There is a very basic principle at stake here; an excessively complex, yet powerful, failed system will not be revived by a complex set of new rules. Complex problems require simple solutions.
OK so what would I have done differently, you are probably asking yourself? This is a very difficult question to answer, but I am starting to reach the conclusion that the answer lies in clamping down on “financial innovation”.
I fear that the Credit Crisis has shown us the market will not be allowed to work on its own. Free-market purists will argue that in fact the market did work perfectly well, hence the crash, but the truth is the system wasn’t allowed to fail, hence the bailouts.
Time will still tell whether or not this strategy has worked, but for the time being, Governments are providing the backstop, preventing total meltdown. A critical feature of a free market economy was apparently the economic good that investment banks were able to stimulate through intelligent innovation. Although it is difficult to find any analysis of the last 2 years, which does not shatter this view, there seems to be an obsession with returning to how things were amongst our leaders.
I absolutely understand the necessity for futures and options in certain markets. Used properly they help businesses and individuals manage risks associated with time sensitive deliveries of real world goods. Innovative funding packages can also had a great deal of value to human enterprise and enable great projects to happen.
However when left unchecked we have all witnessed the dark side of excessive use of “financial innovation” — huge bonuses paid to undeserving executives, traders and sales people, immense value destruction, sharp rises in unemployment etc. etc.
Lord Turner, Chair of the FSA, was absolutely right when he said that a lot of the products created in the previous decade had done nothing to “improve the sum total of human existence”. So surely the answer therefore is not to try and accommodate this behaviour, but actually to curb it.
I started off this piece expressing concern about our future. While there are definite parallels between the ailing Byzantine Empire and our own troubled systems, the truth is I am actually quite positive for our long term future. While Western dominance will wane, I don’t actually believe this will be a bad thing for the Planet.
To end let us not forget our much-valued Chancellor’s response to the need for reform. Apparently we don’t need it! The decisions taken by the Government at the start of their term were sound. Anyone would think there is an election coming up.